How to Conquer Corporations on the California Bar Exam
Here, we tell you how to conquer Corporations on the California Bar Exam. Corporations is regularly tested on the California Bar Exam. The good news is that it is somewhat predictable in terms of how it is tested.
Here, we tell you how to approach Corporations on the California Bar Exam, including some of the highly tested issues in Corporations questions.
Corporations on the California Bar Exam
1. First, know how Corporations is tested.
California has virtually always tested “general” law (rather than California law) on Corporations essay questions.
California now seems to test Corporations under the heading of “Business Associations.” (It frequently does this when Corporations is combined with Agency and Partnership.)
The most common crossover essay involving Corporations (besides when it is tested with Agency and Partnership) is Professional Responsibility. Corporations is occasionally tested with Professional Responsibility, so you shouldn’t be surprised to see this crossover essay.
2. Be aware of the highly tested issues.
The State Bar of California tests certain issues over and over again in the Corporations essay questions. (We have a nice summary of these in our California Bar Exam One-Sheets.)
Some of the “favorite” California Bar Exam issues on Corporations questions include the following:
- The duty of care and the business-judgment rule: remember there is a presumption that in making a business decision, the directors acted on an informed basis, in good faith, and with the honest belief that the action taken was in the best interest of the company.
- The duty of loyalty is heavily tested: be aware of the “interested director” transaction, the prohibition on competing with one’s own company, and usurping a corporate opportunity.
- Piercing the corporate veil: To pierce the corporate veil, the plaintiff generally must show:
- undercapitalization of the business, or
- an alter-ego theory (e.g., failing to follow formalities, commingling of assets for personal and corporate use, failure to keep proper accounting, etc.), or
- the corporation has been used to commit a fraud.
- Note: Questions sometimes crossover with Agency and test actual and apparent authority. Be aware that officers have actual—or at least apparent—authority to bind the corporation in many instances. For example, a president has actual implied authority to enter into a contract in the ordinary course of business
3. Be aware of the approach you should use for highly tested topics.
We recommend looking at past essays so you can see how to approach the highly tested Corporations issues.
- When the duty of loyalty is tested, it is also a good idea to discuss defenses to liability for a breach of the duty of loyalty, even if these defenses do not seem applicable.
- When piercing the corporate veil is an issue, you should talk about the three theories under which a plaintiff could pierce the corporate veil (undercapitalization, alter-ego theory, and fraud) even if only one is applicable.
Getting a general approach for what the examiners expect to see when certain issues are tested will help you maximize your score on the Corporations question. Further, it will save you time since you won’t have to spend too much time thinking about what to write if you already have an approach down.
4. Be aware of the “basics” of Corporations law.
Many examinees do not understand the basic principles of Corporations. This is especially the case for those that did not take a Corporations class in law school. And, it can be very difficult to become well versed in Corporations by watching just one bar exam lecture. If you don’t understand basic principles (like the role of directors and the role of shareholders) then you will find it very hard to memorize the law. Further, even if you are able to memorize the law, you will have a hard time applying it to fact patterns.
So, it is a good idea to get the basics down first!
Here are a few notes on Corporations basics:
- Directors manage the corporation. Thus, they meet regularly. They must vote responsibly, so they cannot vote by proxy or voting agreement. (Their judgment should not be unfairly affected by a proxy or voting agreement!). The business-judgment rule applies and they are presumed to act reasonably.
- Shareholders own the corporation. Because they are merely owners, they don’t meet that often but are entitled to annual meetings. They need special notice for meetings. They can vote by proxy or agreement because they aren’t the ones managing the corporation.
- Officers are agents of the corporation. They are the president, secretary, treasurer, etc. They are the “hands and feet” of the corporation because they have the power to enter into transactions. (Look for an Agency crossover if you see an officer, say, enter into a contract on behalf of the corporation. They likely have actual or apparent authority to do so!)
- A corporation must be incorporated (i.e., articles must be filed with the state) in order for a valid corporation to be formed.
Being familiar with the basics will help you memorize the nuances. The basics will serve as “building blocks” and some of the details will make more sense (and be more memorable) once you have the basics down.
5. Get the vocabulary down!
Many examinees struggle with the vocabulary used in Corporations questions. A lot of the vocabulary will be nuanced and unfamiliar—particularly if you are learning Corporations for the first time. Here, we give a layman’s version of some vocabulary terms that may help you remember them!
Layman’s version of Corporations vocabulary
- “Articles of incorporation”: A fancy word for “contract” (the corporation’s contract with the state).The articles include basic information like the corporation’s name, address, names of incorporators, etc. Additional provisions can be added. The corporation files these with the state (they are public).
- “Dividend”: A fancy word for “profits.” The whole reason shareholders buy shares is because they want to be paid profits.
- “Subscription”: A fancy word for “offer.” A subscription is an offer to buy shares. In general, it must be in a signed writing and state a price.
- “Promoter”: This is someone who is “promoting” a corporation before it is even formed. So let’s say you and I want to form a corporation to sell coffee. We send in our articles to the state (but it takes a while to get them back) and we are eager to get started on our very lucrative business idea. Thus, I personally sign a lease with a landlord agreeing to rent space for one year. I sign my name, “John Doe, on behalf of Coffee, Inc., a corporation to be formed.” I am “promoting” the corporation by entering into leases on its behalf before it is even in existence. Thus, I am the promoter. I am liable on the lease.
- “Ratify”: A fancy word for “approve.” The corporation in the above example is liable if it ratifies or approves of the contract. It could expressly ratify the lease by signing its name to it (and becoming liable) or impliedly ratify the lease (e.g., by moving in and acting as if it is part of the lease agreement!)
- “Directors”: Remember that directors “direct” or manage the corporation! (Shareholders merely hold shares of, or own, the corporation.)
- “Quorum”: Quorum is a term that states when voting can take place. A quorum is a fancy word for “majority.” It means a majority of people or shares have to show up at a meeting (and then more have vote for than against the proposal) for it to pass.
Being familiar with key vocabulary will help you gain credibility with the grader and it will help you maximize your bar exam essay score!
The best way to get good at Corporations questions is to practice essays. This will help you become acquainted with how Corporations is tested (including crossover essays). And it will help you master the highly tested issues.
Here are a few essay questions with student answers that we recommend you practice to get exposed to some highly tested topics in Corporations essay questions:
- February 2017 essay question and student answer (see essay question #4 on the exam—it is called “Business Associations”)
- July 2015 essay question and student answer (see essay question #5 on the exam—it is called “Business Associations” and is tested with Professional Responsibility)
Good luck studying for the California Bar Exam!
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